Stipp: Moving to look at the regional exposures of your funds. Have you found that you – in your research and looking for good investments, that there are any themes to where you've been investing recently? Anything bubbling up about areas of opportunity that you're seeing, versus maybe some other areas where it looks a little bit rich to enter into a new position now?
Foster: I think valuations as a whole are tricky across the region. I think we entered the year a little overvalued for my taste and after a great deal of fluctuation, we're right now in the middle of July, about where we started the year. I was very comfortable with valuations at the low points in June, but we've already seen quite a recovery since that point.
So I think valuations are fair, but they don't take into account some of the risks that might emerge over earnings. We are seeing inflation really pick up and that's impacting the wages and other raw material costs for companies, and I don't think that's really factored into what are still very high consensus earning estimates for the end of the year.
But I think on the positive side, where we're really looking especially in the fund and at Matthews, more broadly, is focusing on one area in particular, which is the emerging services economy in Asia and the consumer-oriented sectors that are service-dominated.
I think Asia's growth over the last decade or two is really being fueled by heavy investment in export sectors, in manufacturing sectors. I think these areas of growth will continue, but I think the real marginal growth will accrue in the service sectors of the economy like health care, consumer stocks.
And on the geographical basis, I think the fund is highlighting Japan right now, too. We have an oversized position in Japan, a little over 10% relative to history, and it's not because we're incredibly bullish on the big picture in Japan, but I found valuations there on individual companies that I think are quite compelling.
Stipp: One to the themes that we've heard from some managers, speaking of Japan, have found some individual stocks that they like there, and part of the reason is that they see it as kind of back-door exposure to China, because of the business that some Japanese companies might have in China, but they also maybe have better valuations. What are some of the cases that you built around your individual picks in Japan, what has made them attractive for you, maybe in a market or in an economy that has less attractive macro characteristics?
Foster: I have some trouble with sort of back door hypothesis, because a lot of those companies, unless they are very geared to China, just don't have enough exposure to really move the needle, if they're having 10% or 20% of the sales, but I do think that companies that have a portion of their sales diversified overseas, whether it'd be in Western markets, the U.S. or Europe, or in Asia, is a very healthy thing for some of these companies.
There is a tier of corporate Japan, especially mid-cap stocks, maybe some of the larger small-cap stocks that have really been overlooked by the market, I think, at this point. The economy has barely treaded water in recent years and has been going through a deflationary period for two decades now, and it's just meant that people have thrown out some of the babies with the bathwater. And in that segment of the market, you've got some very healthy and well run, very disciplined companies, who have learned to control costs in a deflationary environment, which is a very tough thing to do, and yet they are growing revenues, albeit at a marginal pace, so I think there are some attractive opportunities in Japan.
Stipp: Do you have a specific example then of a Japanese company that illustrates the qualities that you've been looking for in that area?
Foster: One of our core holdings in the Japanese portion of the portfolio is called Hisamitsu Pharmaceutical. It is a very interesting company. It is a mid-cap in size, about $3.7 billion, and has about a 2.2% dividend yield, and what I found attractive about it was its range of products, first and foremost. It's engaged in a number of different therapies. They're basically patches that release medicine into your skin and they have therapies that are sold over the counter. There is something like a BENGAY equivalent in a patch, all the way up to very advanced cancer pain treatments and analgesics for prescription markets. But it's been a very conservatively run company, historically a very cash-rich balance sheet, but during the 2008 crisis, they did something very interesting and arguably uncharacteristically Japanese and that's they got very aggressive at the worst part of the market and bought a U.S. company called Noven for about $400 million.
And in so doing, they spent some of their cash that was on their balance sheet. They deployed the cash I think in a very friendly way, and it gained a lot of synergies from this acquisition. Noven is engaged in a very similar line of products and yet there was absolutely no overlap in the actual therapies that they are pursuing. So, I think it's a very interesting growth path to have some of the exposure they do in the U.S. and some new therapies to boot.
Stipp: It sounds like a very gutsy move of them to make such a move in a down market, but probably one of the best times to make such an investment.
Foster. Right. Instead of having a lazy balance sheet that was cash-rich and perhaps not very efficiently deployed. They got aggressive at the worst part of the market, and I think they're going to see better growth ahead as a consequence.